Australia has the Third Largest Pension Fund Assets in the World

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Edmund Tang

Benchmark Report

Australian Economy

FDI

International Investment

Australia’s pension funds (“superannuation” in local terms) are the third largest in the world with total assets of almost US$1.5 trillion (or A$1.9 trillion) in 2015. The latest figure represented a 10 per cent increase (in Australia dollars (A$) terms) from the level of 2014 and meant that Australia accounted for 5.7 per cent of the world’s total pension funds of about US$25 trillion last year. Australia’s pension fund assets rose to 118 per cent of the nominal GDP in 2015, up from 78 per cent a decade ago. The ratio was the fourth highest among the 58 major pension markets in the OECD survey, Pension Funds in Figures.

The robust growth in Australia pension fund assets in 2015 was largely driven by continued inflows of member and employer contributions on the back of Australia’s mandatory pension fund system (introduced in 1992) and its favourable tax treatment. In addition, the solid growth was boosted by Australia’s high average real rate of net investment returns of over six per cent last year. Our rate was much higher than the OECD average rate of only 0.4 per cent and non-OECD selected economies of -3.1 per cent (see chart below).

According to the OECD, the US remains the world’s largest pension fund market with a total share of over 56 per cent of global pension fund assets, while the UK has the second-largest market share with around 10.6 per cent. Australia has the third-largest share with 5.7 per cent, while Japan and the Netherlands are fourth and fifth largest respectively with around a five percent share each. The combined share of these top five markets is estimated to be 83 per cent of total investment assets of 34 OECD members and 24 non-OECD selected economies.

Overall, total pension fund investments in the 34 OECD countries was US$24.8 trillion in 2015, down slightly from US$25.2 trillion in 2014. However, the OECD in its study highlighted that when pension fund investments were expressed in local currency, their asset values increased in all markets in 2015, with the exception of Denmark, Luxembourg, Poland and the US.

The decline of total OECD pension fund investments in US$ terms was broadly driven by the depreciation (-0.9 per cent) of US pension assets. This was further aggravated by the negligible growth rates of less than two per cent in three other major markets, Japan (1.6 per cent), the Netherlands (1.7 per cent) and the UK (1.9 per cent).

Overall, one of the critical factors that triggered the fall of OECD pension fund investments was the low real net investment returns in 2015, with a weighted average of only 0.4 per cent in 2015. Twenty two economies within the group had positive investment rates of return, but lower than 2 per cent for eight of them. Three economies with negative return rates were the US, Poland and Turkey. The poor performance could be partially explained by negative equity returns in some quarters of 2015. Meanwhile, the small rate of investment return was exaggerated by the US dollar strengthening again other major currencies during 2015.

On the other hand, pension fund investments performed relatively well between 2014 and 2015 in all 24 non-OECD selected economies. However, the total value of their pension fund investments remained insignificant compared to the OECD members because most of the funded pension systems in these markets are not mature yet. Overall, their pension fund assets totalled only US$539 billion or represented around two per cent of the world’s investment assets in 2015.

General notes from OECD Pension Funds in Figures 2016:

Within the framework of the OECD Global Pension Statistics (GPS) project the data sources are national pension authorities. Data provided in this note are preliminary and may be revised in the newsletter Pension Markets in Focus, No.13 expected to be released later this year.

Data focus on autonomous pension funds as per the OECD classification. All types of plans are included (occupational and personal, mandatory and voluntary) covering both public and private sector workers.

Data for 2015 refer to the end of 2015, except for: Australia and Egypt where data refer to end of June 2015; New Zealand where data refer to end of March 2015; Belgium, Canada, and IRAs in the United States.

Source: PENSION FUNDS IN FIGURES June 2016, page 6

Superannuation in Australia

Superannuation is the term used in Australia to describe the setting aside of income for retirement, generally known internationally as pension or retirement products.

Australia’s current ‘superannuation guarantee’ system was introduced in July 1992, requiring all employers to make tax-deductible superannuation contributions on behalf of their employees.

Employers and individual employees can also make voluntary contributions to their superannuation. These contributions are subject to income tax concessions, up to certain limits.

Prior to the superannuation guarantee, most Australians’ superannuation were in defined benefit funds, however today the vast majority of superannuation funds are accumulation or defined contribution.

More information on the superannuation guarantee is available through the ATO website at www.ato.gov.au.